February 2019 Board Meeting Summary

The Budget and Audit Committee of the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees convened at 8:30 a.m. Monday, February 11 in the Retirement System offices in Jefferson City, MO, with the regular session of the Board of Trustees meeting following at 9 a.m. In attendance were Board members Aaron Zalis, Jason Hoffman, Scott Hunt, Chuck Bryant, Jason Steliga and Yvonne Heath. Board Member Beth Knes also attended via teleconference. Also present were Executive Director, M. Steve Yoakum; Assistant Executive Director, Investments, Craig Husting; Assistant Executive Director, Operations, Dearld Snider; General Counsel, Sarah Swoboda; Chief Financial Officer, Anita Brand; Director of Member Services, Nicole Hamler; Director of Employer Services, Omar Davis; Director of Legislation and Policy, Maria Walden; Director of Communications, Susan Wood; Chief Technology Officer, Bill Betts; Director of Administrative Planning and Design, Stacie Verslues; and various other PSRS/PEERS staff members.

Budget and Audit Committee

Minutes
The open session minutes from the December 10, 2018 Budget and Audit Committee meeting were approved by unanimous vote.

Budget Amendment
Ms. Anita Brand of PSRS/PEERS led a budget amendment discussion. The Systems have been evaluating facility needs over the past three years. The fiscal year 2019 budget was approved at the Board of Trustees' June 2018 meeting. As noted in the fiscal year 2019 budget document, the budget request did not include a request for building improvements. However, the Systems were continuing to evaluate the replacement of the HVAC systems and other aging infrastructure needs. The Board of Trustees approved a renovation and new addition to the Systems' current building at their December 2018 meeting. Ms. Brand requested a budget amendment to facilitate these building projects including, architectural services, surveys and permits. The budget amendment was approved and recommended for acceptance by unanimous vote by the Budget and Audit Committee.

Regular Board Meeting

System Operations

Minutes
The open session minutes from the December 10, 2018 Board meeting were approved by unanimous vote.

Investment Report

Investment Performance Report (12/31/18)
Mr. Craig Husting from PSRS/PEERS and Mr. Barry Dennis from Verus reviewed the investment performance for the period ended December 31, 2018. The one-year PSRS/PEERS investment return was reported as -1.0%, while the fiscal year return (July 1, 2018 through December 31, 2018) was reported as -3.0%.

Ongoing Investment Activities
Mr. Husting and Mr. Dennis reviewed ongoing investment activities, which included estimated investment performance through January 31, 2019. Mr. Husting discussed the current asset allocation of the PSRS/PEERS portfolio, in which he reviewed the long-term strategy, portfolio themes and the broad portfolio expectations. Mr. Husting also reviewed the tentative Board investment calendar.

Anti-Terrorism Policy Review
Mr. Husting and Mr. Dennis reviewed the Systems' Anti-Terrorism and Economic Sanction Investment Policy. The policy was adopted by the Board in 2005 and last reviewed with the Board in February 2018. The policy requires PSRS/PEERS staff to provide a report to the Board on an annual basis that identifies any investment actions taken due to links to terrorist or sanction related activities.

Mr. Husting stated that the Systems have several safeguards in place to ensure compliance with the policy, including:

At the end of the report, Mr. Husting stated that both staff and the general counsel recommended that no action be taken this year with regard to the Anti-Terrorism and Economic Sanctions Investment Policy.

Affirmative Action Policy Review
Mr. Husting and Mr. Dennis reviewed the Systems' Affirmative Action Policy and Procurement Action Plan. The policy was last revised in October 2014 and last reviewed with the Board in February 2018. The policy requires PSRS/PEERS staff to provide a report to the Board on an annual basis regarding the Systems' efforts to assure equal opportunities for minorities and women as money managers, brokers and investment counselors. Mr. Husting stated that the Systems are in compliance with the policy.

Sections 104.621, 105.702, and 169.573, RSMo require the Systems to make an annual report to the Governor's Minority Advocacy Commission and the Joint Committee on Public Employee Retirement regarding the progress made in the area of utilization of minority and women money managers, brokers and investment counselors. Staff submitted the required report on January 30, 2019.

At the end of the report, Mr. Husting stated that both staff and the general counsel recommended that no action be taken this year with regard to the Affirmative Action Policy and Procurement Action Plan.

U.S. Equity Program Review
Mr. Husting provided a broad overview of the Public Equity Composite. Mr. John Tuck, Mr. Travis Allen and Mr. Chad Myhre from PSRS/PEERS reviewed the Systems' U.S. Public Equity portfolio including program objectives, guidelines and long-term results. The five-year annualized returns for the Large-Cap and Small-Cap U.S. Public Equity composites for the period ended December 31, 2018 were 7.7% and 3.6% respectively.

Non-U.S. Equity Program Review
Mr. Frank Aten and Mrs. Jessica Wilbers from the PSRS/PEERS investment staff reviewed the Systems' Non-U.S. Equity portfolio including program objectives, guidelines and long-term results. The five-year annualized return for the Non-U.S. Equity composite for the period ended December 31, 2018 was 3.4%.

Management Report

Board Governance
Mr. M. Steve Yoakum from PSRS/PEERS presented the Board governance report recently completed by Cortex Applied Research, Inc (Cortex). Cortex conducts a general review of the extent to which the Board is operating in accordance with its governance policies and charters. The process involves reviewing Board and committee meeting minutes and related documentation, as well as follow-up discussions with senior management. Mr. Yoakum explained that the primary goal of the annual review is to ensure that the Board's governance policies and charters are living documents that truly guide how the Board functions, while also evolving to meet the changing needs of the Board and the Systems over time.

Overall, Cortex found the policies and charters to be appropriate and identified only minor issues and improvement opportunities. Cortex made the following recommendations:

  1. Add language affirming the executive director's authority over the selection, direction and evaluation of senior management
  2. Authorize the executive director to select and appoint specialty and asset class consultants
  3. Hold an exit interview with the internal auditor should he or she cease to be employed by the Systems
  4. Update our regulation and add language to policy to allow the Board to hold a meeting in months other than those specified
  5. Remove the statement that ex-officio members may be counted towards quorum for Board committee meetings.

After review, the Board voted unanimously to table the changes relating to the executive director's authority over selecting and appointing asset class consultants for further discussion in April and to approve the remainder of the report with all other suggested changes.

National Institute on Retirement Security Study
Ms. Anita Brand from PSRS/PEERS presented on a joint study by the UC Berkeley Labor Center and National Institute on Retirement Security (NIRS), "Teacher Pensions vs. 401(k)s in Six States: Connecticut, Colorado, Georgia, Kentucky, Missouri, and Texas." Ms. Brand gave a summary of the key findings of the independent study, which reinforce the Systems are achieving their goals:

The results of the independent study are very powerful and clearly indicate that Missouri teachers are better off in PSRS, a defined benefit plan than a 401(k) plan. The study provides the following summary comment: "And because traditional pension benefits are designed to encourage and reward long service, they help schools retain experienced teachers, and allow older teachers to retire with sufficient income when they are ready to retire, as their productivity begins to decline."

A summary of the key findings and statistics from the independent study can be viewed at Research Shows Value of Pension Plans:

Research Shows Value of Pension Plans

A copy of the study can be found at the following link: https://www.nirsonline.org/reports/teacher-pensions-vs-401k/

Actuarial Services
Ms. Brand discussed the current contract and history with our actuary, PricewaterhouseCoopers (PwC). PwC's initial contract was renewed through negotiation for an additional five years through the fiscal year 2018 engagements. State statute requires the Systems to have an actuarial audit at least every 10 years and to perform an experience study at least every five years. Ms. Brand reminded the Board that changing actuaries is not in and of itself a negative practice but changing actuaries should not be done at frequent intervals due to the substantial learning curve. The number of actuarial firms with a focus on defined benefit plans, specifically public defined benefit plans, has decreased significantly. But there are other firms that would bid, should the Systems decide to issue a request for proposals (RFP). The Board will review negotiated terms with PricewaterhouseCoopers in April 2019.

Facility Renovation/Construction Management at Risk Approach
Mr. Dearld Snider and Ms. Sarah Swoboda of PSRS/PEERS presented on our current renovation timeline and intent to utilize Construction Management at Risk (CMAR). The System is currently in the schematic design phase and construction is set to begin in the fall of 2019. Mr. Snider explained that two construction approaches were considered: Traditional Design-Bid-Build and Construction Management at Risk. Ultimately, the Systems intend to utilize the CMAR approach, as it creates the best collaborative team structure, provides more accurate cost estimating and will allow for a faster transition from the design documents to the start of construction. Mr. Snider also discussed the selection criteria that the Systems will use to choose a construction manager at risk and Ms. Swoboda detailed the Systems timeline for CMAR.

Budget Amendment
The Systems have been evaluating facility needs over the past three years. The fiscal year 2019 budget was approved at the Board of Trustees' June 2018 meeting. As noted in the fiscal year 2019 budget document, the budget request did not include a request for building improvements. However, the Systems were continuing to evaluate the replacement of the HVAC systems and other aging infrastructure needs. The Board of Trustees approved a renovation and new addition to the Systems' current building at their December 2018 meeting. Ms. Brand requested a budget amendment to facilitate these building projects including, architectural services, surveys and permits. The Board of Trustees approved the budget amendment as recommended by the Budget and Audit Committee by unanimous vote.

Legislative Update
Ms. Maria Walden from PSRS/PEERS and Mr. Jim Moody, legislative consultant, updated the Board on the current legislative session. Mr. Moody reported briefly on state revenue and gave an update on January 2019 revenue to the Board. He also discussed sales tax growth and Missouri income from capital gains and dividends.

Ms. Walden reviewed the upcoming important legislative dates, the legislative statistics and new legislation filed. Several bills have been filed this year that have a direct impact on the Systems:

This bill repeals the July 1, 2014 termination date of a provision allowing PSRS members who have 31 of more years of service to have their retirement benefit calculated using a benefit factor of 2.55%.

No contributions would be required from the employer or retiree. This bill does not contain a refund provision.

PricewaterhouseCoopers (PWC), the Systems' actuary, prepared a cost statement that indicates this bill would have no fiscal impact to PSRS and the fiscal impact to PEERS would be an insignificant loss.

The Board went on record unanimously in support of HB 77 and SB 17 as long as the bills(s) do not contain a refund provision, which would jeopardize PSRS/PEERS' federal tax exemption status.

PWC is currently working on a cost statement regarding this provision.

A PWC cost statement indicates an insignificant fiscal savings to PSRS and PEERS for this bill. The Board went on record unanimously in support of HB 723.

The Board went on record unanimously in opposition to HB 864.

Other legislation of interest:

CPI-U Update
Mr. Yoakum reviewed the current COLA policy. The COLA policy was last updated by the Board at their November 3, 2017 meeting. The COLA for January 2019 was 2.00%.

2017 Board Approved Funding Policy Effective for January 1, 2019 COLA
CPI-U COLA per Board-Approved Funding Policy
Less than 0.0% 0.0%
0.0%-2.0% 0.0% when CPI-U is cumulatively below 2.0%
0.0%-2.0% 2.0% when CPI-U cumulatively reaches 2.0% or more*
2.0%-5.0% 2.0%
more than 5.0% 5.0%
*resets cumulative calculation after a COLA is provided

Mr. Yoakum explained that the Consumer Price Index for Urban Consumers (CPI-U) is calculated by the Bureau of Labor Statistics (BLS). The CPI-U is the measure of the change in prices of goods and services purchased by urban consumers between any two time periods. PSRS/PEERS' regulation requires that the time period for the CPI-U calculation used in the determination of a COLA be from June to June. Based on the values provided by the BLS, the CPI-U is down -0.3000% for the six months ended December 31, 2018.

Raw CPI-U Index Values
  Index Values
June 2018 251.989 Month To-Date
July 2018 252.006 0.0001 0.0067%
August 2018 252.146 0.0006 0.0623%
September 2018 252.439 0.0012 0.1786%
October 2018 252.885 0.0018 0.3556%
November 2018 252.038 -0.0033 0.0194%
December 2018 251.233 -0.0032 -0.3000%
The January reading for the CPI-U will not be released until February 13, 2019.

Public Comment
Mr. Charles Rorex of Farmington thanked the Board of Trustees and Mr. Steve Yoakum for all they've done and continue to do for the Systems. Mr. Rorex also asked the Board to consider increasing the lifetime COLA cap (maximum) for those retired teachers who make under $50,000.

Closed Session

The Board went into closed session at 12:45 p.m.

Adjournment

The Board adjourned at 1:30 p.m.

This summary is not official minutes of the PSRS/PEERS Board of Trustees Meeting. The official minutes will be approved at the next PSRS/PEERS Board of Trustees meeting and will be posted to our website at that time.